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(B)(N) The Great Rotation & Twenty Hot Canadians

October 7, 2016
amen-the-fundamentals-zero

The Fundamentals

Drama. We started a portfolio of Twenty Hot Canadian Stocks in early January but the only thing that was “hot” about these Canadians is that they were trading at or above their “price of risk” when we bought them and, secondly,  we could establish our usual risk price, stop/loss price, and market price “arbitrage” with reasonable but not necessarily perfect certainty at the time.

Otherwise, we don’t know anything about these companies or their stock prices or what they might be tomorrow or next week, and we also dare to run a much larger portfolio of dozens of similar stocks in the Toronto market which we bought, held, or sold for the same reasons as above and which we’re running as a (B)-class portfolio (please see below).

But despite our astonishing ignorance of all of these companies and their stocks, they returned +21% this year in dividends and capital gains at their current stop/loss prices and +35% at the current market prices, and we’ve been stopped-out on four of them and are holding them as cash, but we’re still getting a current 2% dividend yield on the rest of them and we can’t do any worse than that no matter what the market does tomorrow.

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Figure 1: S&P/TSX Composite Index

In contrast, the S&P/TSX Composite Index is up only +14% this year (not +35% as above) but it’s also been down by as much as (-8%) and nobody knows why except for the obvious reason – a lot of investors were all selling their stocks at the same time and then they stopped selling them because there were lots of buyers at lower prices – and that could happen again quite soon because there is no reason for a stock price, any stock price at any time, other than what somebody is willing to pay for it; please see Figure 1 on the right.

A Stock Chart, a Ruler, and a Good Eye

Canadian dollar stocks are cheap in US dollars, euros, and yuan and certainly one move for patient money is to take a position in the Canadian resources industries – the mines, woods, and oil & gas – which are mostly trading in the (N)-class and have been for the last several years and that move is equivalent to buying bonds at a steep discount because these companies are paying dividends (even if they have to borrow the money) at high yields pending a possible bankruptcy or reorganization or takeover. Or possibly prosperity.

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Risk? What Risk?

But to get some patient money that we don’t have in our pocket right now to spend or pay our bills, we can work the active market in the (B)-class portfolio and re-invest our profits as we can afford them.

And all that we really need is a stock chart, a ruler, and a good eye, and some money to invest but not to lose and the charts below show why it is very important to get into the market and find the reason to stay in because investing has a lot more to do with “investors” than it does with the “investments”, the companies and their stocks, which are merely the “underlying” for a wholly different game that we need to play with the “investors”.

For example, the portfolio of stocks that we bought for $94,000 in early January this year (as above, the Twenty Hot Canadians), was available for less than 1/3rd of that price ($28,000) in January 2012 and since there’s no reason to think that the market will behave any differently in the next five years than in the last five years, we cut a free “reality cheque” to see what we missed by not running this portfolio as a (B)-class portfolio this year and every year since 2012, and how we might amend that bad behavior for the future because the (B)-class portfolio in these same stocks more than tripled our money (+250%) and paid an average of 30% per year for the last five years with no risk at all because our net worth in this portfolio was always non-decreasing; please see Exhibit 1 below for more details.

Do you play poker?

We’ve noted in the charts below that the market doesn’t have to make any sense and if that was what we were waiting for, or looking for, for “sense”, then we might as well have stayed home, bought some popcorn, and watched the game.

poker

Poker. That’s all there is to it.

On the other hand, “working” the market is a lot like playing poker; our ante is the risk price which is the least stock price at which we will buy or hold a stock, and we will wait until we get it because this is not the only game in town and we don’t want a cheap “ante” and, thereafter, we need only keep raising the stop/loss price (our bet on our cards) until the market calls our bluff and demands to see our cards – they get the stock (our cards) and we get their money (the pot). Oh well.

But we don’t want to play in the “penny ante” games that we call the (N)-class, nor do we chase nickels in front of bulldozers, but the market can’t seem to stop doing that by buying index funds and ETFs and all sorts of other things that are supposed to profit from the market volatility and investor uncertainty  – maybe that’s because it’s not their money, it’s just our savings and pension plans and keeping our money safe is not their job. It’s ours.

Please see Exhibit 1 below for a summary of the Cash Flow performance of this portfolio (and click on it and again to make it larger as required).

Exhibit 1: Twenty Hot Canadians – The Fundamentals & Cash Flow Summary

exhibit-1-bn-canadian-hot-stocks-fundamentals-cash-flow-summary

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Figure 1.1: ADN Acadian Timber Corporation (B+)

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Figure 1.2: AEM Agnico Eagle Mines Limited (B+)

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Figure 1.3: ARE Aecon Group Incorporated (B+)

tgx-atd-b-alimentation-couche-tard-incorporated

Figure 1.4: ATD-B Alimentation Couche-Tard Incorporated (B+)

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Figure 1.5: BAA Banro Corporation (B+)

tgx-bam-a-brookfield-asset-management-incorporated

Figure 1.6: BAM-A Brookfield Asset Management Incorporated (B+)

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Figure 1.7: BCB Cott Corporation (B-)

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Figure 1.8: CCL-B CCL Industries Class B (B+)

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Figure 1.9: CLS Celestica Incorporated (B+)

tgx-csu-constellation-software-incorporated

Figure 1.10: CSU Constellation Software Incorporated (B+)

tgx-dgc-detour-gold-corporation

Figure 1.11: DGC Detour Gold Corporation (B-)

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Figure 1.12: DOL Dollarama Incorporated (B+)

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Figure 1.13: EXE Extendicare Incorporated (B+)

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Figure 1.14: FSV FirstService Corporation (B-)

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Figure 1.15: GIB-A CGI Group Incorporated (B+)

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Figure 1.16: JE JustEnergy Group Incorporated (N)-Class

tgx-lsg-lake-shore-gold-corporation

Figure 1.17: LSG Lake Shore Gold Corporation (Acquired)

tgx-mfi-maple-leaf-foods-incorporated

Figure 1.18: MFI Maple Leaf Foods Incorporated (B+)

tgx-mru-metro-incorporated

Figure 1.19: MRU Metro Incorporated (B-)

tgx-ng-novagold-resources-incorporated

Figure 1.20: NG NovaGold Resources Incorporated (N)-Class

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Figure 1.21: OCX Onex Corporation (B+)

For more information on the current Canadian market, please see our Posts “(B)(N) Extreme Economics – A Stock Chart, a Ruler, and a Good Eye” and “(B)(N) Extreme Economics – Plan Zero (Buy Canadian)“.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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